Stop with the terrible GameStop punditry

The Reddit-fueled GameStop stock surge is an interest technical market story.
But pundits are trying to make it much more than that.
GameStop trading is not a class war, an Orwell novel, or an event with broader societal implications.
George Pearkes is the global macro strategist for Bespoke Investment Group.
This is an opinion column. The thoughts expressed are those of the author.
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You know that financial markets have gotten truly out of hand when people start quoting the Bible. Unfortunately, I’m going to have to do that to start this column.

Proverbs 17:28 notes that “Even fools are thought wise if they keep silent, and discerning if they hold their tongues.” And yet an absolute litany of pundits, market commentators, and social media personalities haven’t followed that advice this week.

GameStop’s short squeeze, explained

GameStop’s stock has been the cause celèbre of our collective madness over the last few days, and it’s understandable why it’s gotten a lot of attention.

The basic story is this: a struggling but well-known company had large bets placed against it in the equity market by short sellers. Investors borrowed shares and sold them, hoping to gain by buying the shares back at a lower price. Unfortunately, the price didn’t drop, because a lot of enthusiastic small traders with high risk tolerance piled into the stock.

This crowd of retail traders learned about the opportunity and loosely coordinated their activities via Reddit’s r/wallstreetbets community, and were empowered by low cost, easy to use trading platforms like Robinhood. Some added call options, hoping that the people they bought the options from would buy the underlying stock to hedge and keep pushing the price up.

With shorts underwater, they had to offload their bets against GameStop’s stock. But of course, that creates a problem: they need to buy shares to get out. The resulting parabolic price action – as shorts bought shares to close their trade while the Reddit-fueled masses continued to pile in – is known as a “short squeeze” and the 1744% year-to-date gain for GameStop is an especially acute version.

Losses were so large for one specific fund that they were forced to sell part of their business to a pair of private investors: Citadel (which operates a securities business that helps facilitate the commission free trading on Robinhood that helped start this whole situation) and Point72, the family office run by Mets owner Steve Cohen.

This all would have been very interesting to stock market nerds. But of course, we can’t just let a story like this be interesting and mechanically unique. Instead, it’s got to become a morality play.

Cui bono sponsionibus?

The idea that a group of message board traders could take down a multi-billion dollar hedge fund led to an instant proliferation of cheering for little guys “Sticking It To The Man.” But of course, there’s a problem with that logic.

The WallStreetBets poster that initially identified GameStop and drove interest in the stock invested $50,000 of his cash in stock and call options, and the position is now worth over $50 million. While that poster is to be commended for such an impressive return, anybody with $50,000 to throw into an extremely high-risk equity market trade doesn’t fit a reasonable definition of “the little guy.”

While WallStreetBets likes to position itself as a bunch of misfits and outcasts, the actual identities of the folks who populate the board (to say nothing of who have benefitted from the GameStop surge) are unknown. What we can say is that the single largest individual holder of GME is Donald Foss, a billionaire pioneer of subprime auto finance. He owns 5% of the company. This is not the little guy you’re looking for.

As for Melvin Capital, the hedge fund that has reportedly lost as much as 70% in its ruinous effort to short GameStop, there should be no tears shed. Business television anchors crying foul that the fund could be run over or the CEO of the NASDAQ calling for regulators to step in are making fools of themselves trying to defend a firm whose professional investors made the bed they are lying in today.

The derivatives are where the real pain is

As bad as some of the first order commentary about GameStop was, things got much worse as prices continued to roar and the spiral of “takes” moved out of stock markets and into the collective cultural narrative.

A marketing professor tried to claim that this was all womens’ fault because the “young men, in a basement, not at work, not having sex, not forming connection, with an RH account, a phone and stimulus…[are] the perfect storm of volatility”. After Discord suspended the WallStreetBets channel on its service for content violations, a columnist declared a crisis of free speech. A former media company president demanded brokers who manage risk by restricting what securities their clients trade be jailed.

This explosion of half-baked and cockamamie takes is incredibly tiresome, and it’s ultimately a reflection of what has happened with GameStop’s stock. What started out as an interesting stock market quirk got turned into a melodrama that sucked in all sorts of people who have no business being involved, and those new entrants immediately mishandled the situation to their or others’ detriment.

Narratives simplify and obscure

There are real lessons to be learned from GameStop. Late arrivals to the party will inevitably learn the hard way that past gains are no indication of future returns, and that large, aggressive bets work both ways. Sophisticated investors have been reminded that being short a stock creates some unique risk management challenges.

But this is a mechanical short squeeze in the stock market. Not class war, an Orwell novel, or an event with broader societal implications. For non-investors, and especially out-of-depth pundits, Proverbs 17:28 is the way to go.

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